[SOUND] [MUSIC] Before we move on to the financial side of international trade in our next lesson, and maybe useful to contrast, the relatively simple academic world of Ricardian Trade Theory that trumpets the benefits of free trade, the far more complex real world of a global trading environment riddled the direct and indirect forms of mercantilism and protectionism. [SOUND] >> Recall then that the essence of the simplified Ricardian Trade Model is this. When two countries engage unrestricted trade, free of protectionist restrictions, and when these two countries specialize their production according to the Theory of Comparative Advantage, both countries will experience substantial gains from trade. So at least in this Ricardian and theoretical world, trade is a win-win for these nations. The jargon of game theory creates a positive-sum game where no one wins at another's expense. In the real world, however, if one country cheats on the other by using unfair trade practices like illegal subsidies to promote its exports, and or by deploying tariffs or non-tariff barriers to protect its own markets, free trade becomes much more of a zero sum game, in which the cheating nation gains at the expense of the cheated nation. In particular, the cheater will see a higher rate of economic growth and create more jobs than would have occurred under free but also fair trade. While the cheated nation will lose both jobs and GDP growth points relative to the Ricardian ideal. [MUSIC] One of the most interesting historical cases of the failure of Ricardian Trade Theory is offered by the entry of the People's Republic of China into the World Trade Organization at the turn of the century. When China joined the WTO in 2001, it gained unfettered access to new markets around the world. However, China also promised to abide by the rules of free and fair trade specified by the World Trade Organization. Nonetheless, over the next several decades, China would systematically engage in unfair trade practices. Such practices range from currency manipulation and the use of the illegal export subsidies to the theft of intellectual property. And the requirement of forced technology transfer for foreign corporations entering the Chinese market. >> Simply an undervalued currency makes Chinese coffee makers $10 a piece instead of 15 or 20, and it makes American cars in China $30,000 instead of 25. >> In addition, China would benefit unfairly from it's use of sweat shops and from it's role as a pollution haven. Benefits that resulted from a set of Chinese environmental and health and safety regulations much laxer than many of it's competitors. >> I had a plywood manufacturing facility in Bowling Green, Kentucky selling plywood to furniture manufacturers in the United States. In 2002 all my competitors were moving to China, essentially I had two choices, I shut the company down or I move it to China. And I opened up three factories in China, and delivered to the customer in the United States 50% cheaper than I could make it in Bowling Green. Manipulating the currency was a huge help for me because it kept our prices down. I had no environmental issues, and, the most important thing was that I could sell my product at cost. And every month, the Chinese government would send me a check for 17% of my exports, and that was my net margin and my profit. >> The mercantile as a result would be a massive structural shift in manufacturing to China, at the expense of growth and jobs in many other countries and regions around the world. And those harmed by Chinese unfair trade practices, would include both the United States and Europe, as well as Australia, Canada, Mexico, and much of Asia, Latin America and Africa. This was certainly not how David Ricardo envisioned free trade, nor, did Ricardo anticipate the ability of China to maintain chronic trade surpluses in a world where currency adjustments are supposed to automatically correct any trade imbalances between nations. Unraveling The Mystery of Exchange Rates and learning about the difference between fixed and floating exchange rate systems, are just two of the topics we will turn to in our next lesson. So take a well deserved break now, if you like, and when you're ready, let's move on to my absolutely favorite lesson in this entire course. [MUSIC]
